Metro Inc.

Metro Inc. (TSX: MRU) is a Canada-based company engaged in the food and pharmaceutical industry. The Company portraits a retailer, franchisor or distributor's role under various grocery banners in the conventional supermarket and discount segments.

Key Highlights

• Growing Same-store Sales: In Q1 2021, the Company registered growth in all the segments through same-store sales. Food same-store sales were up 10.0% as against 1.4% in Q1 2020. Online food sales were up 170% versus last year. Group’s food basket inflation was flat at 2.5%, against 2% compared to the previous year. Pharmacy same-store sales were up 1.3%, with a 4% increase in prescription drugs.

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past eight quarters.

Source: Refinitiv (Thomson Reuters)

• Increase in Dividend distribution: On January 25, 2021, the Company declared a quarterly dividend of CAD 0.25 per share, an increase of 11.1% versus the same quarter last year, payable on March 8, 2021, with a record date of February 11, 2021.

• NCIB programmes: Under the current normal course issuer bid program, the Company may repurchase up to 7 million of its Common Shares between November 25, 2020, and November 24, 2021. Furthermore, between November 25, 2020, and January 15, 2021, they repurchased 1.75 million Common Shares at an average price of CAD 58.39, for a total consideration of CAD 102 .2 million. 

Financial overview of Q1 2021 (In Millions of CAD)

Source: Company 

• In Q1 2021, the company posted sales of CAD 4,278.2 million, which increased by 6.2% compared to CAD 4,029.8 million in the previous corresponding period. The increase was primarily due to growth in same-store sales in all the segments.

• Operating income before depreciation and amortization in Q1 2021 stood at CAD 399.2 million, or 9.3% of sales, as against CAD 363.1 million, or 9% of sales for the corresponding quarter of fiscal 2020.

• In Q1 2021, the company reported Net earnings of CAD 191.2 million against CAD 170.2 million in the previous corresponding period. The increase was primarily due to high revenue, partially offset by growth in depreciation cost. 

Risks associated with investment

The COVID-19 pandemic still clouds the Company's near-term outlook. While the Company foresees revenue to remain above average through this pandemic's duration based on its role as an essential service offering, there is downside risk to this outlook related to increased outbreaks of COVID-19 and potentially severe economic challenges. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Government measures to curb the ongoing pandemic impact have been increased in recent weeks and continue to evolve, and simultaneously the Company foresees its food revenues to continuously grow at higher-than-normal rates against last year, as a portion of the restaurant, foodservice sales continue to transfer to the grocery channel, as in the first four weeks of the second quarter of 2021, food same-store sales were up 12.0% versus the same period last year. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 53.68 on February 25, 2021. We have considered Dollarama Inc, Alimentation Couche-Tard Inc, Saputo Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Emera Inc.

Emera Inc. (TSX: EMA) is a Canada-based energy and services company which invests in electricity generation, transmission and distribution and gas transmission and distribution. 

Key highlights

• An Income play: The group recently paid a quarterly dividend of CAD 0.6375 and increased their annual common share dividend rate to CAD 2.55 from CAD 2.45. At the last closing price, the stock was offering a healthy dividend yield of 5.04%, which looks impressive and encouraging considering the present economic scenario. The company has provided annual dividend growth guidance of four to five per cent through to 2022.

Source: Company

• Huge capex plans: The company plans to invest CAD 7.4 billion over the 2021-to-2023 period and another CAD 1.2 billion for opportunities under development over the same period, resulting in a forecasted rate base growth of 7.5% to 8.5% through to 2023. The investments would be across the portfolio in renewable and cleaner generation, infrastructure modernization and customer-focused technologies.

Source: Company

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past eight quarters.

Source: Refinitiv (Thomson Reuters)

• New director on board: On February 12, 2021, Jackie Sheppard, Chair of Emera Inc. announced the appointment of Karen Sheriff to Emera’s Board of Directors.

Financial overview of FY2020

Source: Company

• In FY2020, the company posted total operating revenues of CAD 5,506 million, decreased by CAD 605 million, as compared to CAD 6,111 million in FY2019. The group witnessed lower revenues under Florida electric utility segment due to lower clause revenues because of a decrease in fuel costs. Also, the company had short revenues from their other electric utility segment where they sold Emera Maine in Q1 2020.
• Operating expenses posted by the company decreased by CAD 409 million to CAD 4,359 million as compared to CAD 4,768 million in FY2019, due to lower regulated fuel for generation and purchased power as a result of lower natural gas prices at the Florida electric utility segment.
• The net income stood at CAD 984 million compared to CAD 710 million over the previous corresponding period, based on lower operating expenses and lower interest expense. 

Risks associated with investment

The company is exposed to many risk factors that can affect its operations and financial health, alone or cumulatively. Some of the risks include the supply of and demand for crude oil, natural gas, natural gas liquids and renewable energy, prices of these commodities, exchange rates, inflation, interest rates. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

We believe the company would post much better numbers in the upcoming period supported by the gradual revival in the economy, and higher demand in the energy sector. Moreover, the Company is making considerable investments in renewable energy and technology assets to protect the environment, which would also benefit them in bringing the operating cost down. The Company holds a cumulative credit facility of CAD 3.7 billion, making them comfortable with the ongoing operations. Furthermore, they continued distributing dividends amid a challenging environment and increased their annual common share dividend rate, which is encouraging from an income investor’s point of view. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating at the closing price of CAD 50.59 on February 25, 2021.

Source: Refinitiv (Thomson Reuters)

SNC-Lavalin Group Inc.

SNC-Lavalin Group Inc. (TSX: SNC) is a fully integrated professional services and project management company, which offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations and maintenance.

Key Updates:

• Stock Hovering above long-term support levels: The stock of SNC closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. Moreover, the stock appreciated ~16% and ~33%, in the last three months and nine months, respectively.

Technical Chart (as on February 25^th, 2021). Source: Refinitiv (Thomson Reuters) 

• Strong Sequential Revival: The company showed a strong revival in its operating performance and reported improved revenue, strong gross profit of CAD 2,005.7 million and CAD 79.3 million, respectively, as compared to CAD 1,952.7 million and CAD 9.6 million, respectively, in Q2FY20. Moreover, the group reported a lower operating loss of CAD 10 million, as compared to a loss of CAD 101.7 million in the previous quarter.
• Ample Liquidity: The company reported ample liquidity, which includes CAD 2 billion under revolving credit facility and CAD 1.1 billion of cash and cash equivalents. With the above liquidity, the company is expected to meet its short-term and long-term capital requirements.
• New Order wins: The company reported an addition of three new hydroelectric projects from Rye Development, LLC. The above project is expected to reaffirm the company’s client’s relationship with Rye, which augurs well for new order generations in the coming days.

Q3FY20 Income Statement Highlights:

• SNC announced its quarterly results, wherein the group posted total revenue of CAD 2,005.732 million, as compared to CAD 2,432.163 million in the previous corresponding period (pcp).
• Direct costs of activities lower to CAD 1,926.404 million, lower than CAD 2,224.255 million in Q3FY19, while restructuring costs stood higher at CAD 32.762 million, from CAD 19.280 million in the previous corresponding period.
• EBIT loss stood at CAD 10.014 million, as compared to a profit of CAD 3,107.996 million in pcp, supported by a Gain on disposal of a Capital investment amounting to CAD 2,970.783 million in Q3FY19.
• The group reported a net loss of CAD 84.422 million, as compared to a net profit of CAD 2,756.609 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company expects a slide in revenue within the Engineering Service segment in Q4FY20 by a low to mid-single-digit percentage on y-o-y basis. This could take a toll on the company’s overall income. Moreover, the group reported a higher debt component, which remains a major challenge for the company as it would likely to increase the finance costs, which might dampen the company’s profitability.

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group reported the win of a construction project amounting to CAD 1.3 billion from the Department for Transport. The project includes the construction of 65 km of new track, a new overpass, two new stations and 16 bridges between Oxford and Cambridge. The above project is expected to boost the company’s cash flows in the coming quarters. We have valued the stock using EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Finning International Inc, Stantec Inc etc. Considering the above-mentioned facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 26.45 on February 25^th, 2021.

SNC Daily Technical Chart (as on February 25^th, 2021). Source: Refinitiv (Thomson Reuters)

Enghouse Systems Limited

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The group's operations are organized into two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Updates:

• Better than Industry Margins: The group reported strong operational performance, which led to solid margins for the company. The company delivered a robust EBITDA margin (more than 30% versus an industry median of ~8.9%) and operating margin (more than 20% versus an industry median of 1.2%) during the last three financial years, which is encouraging. Moreover, the net margin stood at 16.8%, 18.4% and 19.6%, respectively, in FY18, FY19 and FY20, respectively, significantly better than the negative of 5% of the industry median. 

• Improved Cash flows and higher dividend payment: The company reported solid cash flows from operations, during FY20, backed by strong net profit growth coupled with improved working capital management. Cash from operations stood at CAD 168.145 million, as compared to CAD 81.375 million in FY19. Meanwhile, the company also increased its dividend payment to CAD 26.959 million in FY20, from CAD 21.857 million in FY19. 

• Improved traction from Vidyo applications: The company received strong momentum within the Vidyo line of products, driven by consumer preference towards video communications due to the growing usage of face-to-face interaction. We expect the momentum to continue in the coming quarters, supported by the increasing demand for remote work solutions.

FY20 Financial Highlights:

• ENGH announced its full-year results, wherein the group posted revenue of CAD 503.778 million, reflecting a growth of ~30.6% on y-o-y basis. The increase was driven by strong momentum in hosted and maintenance revenue coupled with an increase income from Software licenses.

Segment Highlights (Source: Company Reports)

• Result from operating activities stood at CAD 162.014 million, surged 44.7% over FY19. The increase was supported by increased revenue, partially offset by higher operating expenses (CAD 195.109 million versus CAD 153.873 million in FY19).
• Income before income taxes stood at CAD 121.793 million, significantly higher than CAD 84.248 million in FY19. The quarter was marked by higher amortization of acquired software and customer relationships costs (CAD 44.140 million versus CAD 31.697million in FY19), partially offset by lower finance income (CAD 0.734 million versus CAD 1.805 million in FY19).
• Net Income for the period stood at CAD 98.590 million, as compared to CAD 70.849 million in FY19.

FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The company offers several IT-related services, and the products require constant innovation in order to remain competitive within the industry. Thus, the arrival of any new players with attractive propostion would lead to price competition, which might hinder the company’s margin and client-base.

Valuation Methodology (Illustrative): EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company’s recent acquisition of Portugal based BPO company Altitude Software is likely to deliver improved business prospects in the coming quarters, through its modular software suite, which supports all media channels through its strong inbound and outbound capabilities for both on-premise and hosted contact center activities. We have valued the stock using NTM Industry Median EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered industry (Software & IT-services) median on NTM basis. Considering the above-mentioned facts, current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 54.85 on February 25^th, 2021.

ENGH Daily Technical Chart (as on February 25^th, 2021). Source: Refinitiv (Thomson Reuters)

Lassonde Industries Inc

Lassonde Industries Inc (TSX: LAS.A), is a Canada-based company, which develops, manufactures and markets a range of ready-to-drink fruit and vegetable juices and drinks. The company is a producer of store brand shelf-stable fruit juices and drinks in the United States and a producer of cranberry sauces.

Key highlights

• Capacity Addition: With a total investment of over CAD 30.0 million, the company is trying to increase the production capacity of low-acidity products. Furthermore, the management expects that an additional capacity would increase sales by 25% to 30% upon completing the project.

• Rise in free cash flow: The company generated free cash flows of CAD 45.8 million in Q3 2020, against CAD 7.5 million in the previous corresponding period.

Source: Company

• Positive Demand Outlook: Despite a slide in the overall consumption pattern, the U.S. and Canadian fruit juice and drinks market stood resilient in the recent past, and the company registered a growth of 5.3% on y-o-y basis primarily attributable to the change in the consumption pattern. We expect the above trend to continue in the upcoming days.

• Consistent dividend payment: Despite a challenging operating environment, the group continue to distribute a dividend, which shows the financial flexibility of the group. Recently, the group announced a quarterly dividend of CAD 0.65 per share, payable on March 15, 2021, with a record date of February 23, 2021.

Source: Refinitiv (Thomson Reuters)

Financial overview of Q3 2020

Source: Company 

• The Company posted sales of CAD 495.20 million in Q3 2020, higher than CAD 422.88 million in the previous corresponding period (pcp). The increase was driven by a higher sales of private label products and a favourable change in the sales mix of national brands.

• Operating profit stood at CAD 40.01 million, as compared to CAD 24.95 million in Q3FY19. This increase was explained by higher gross margins from the Company's U.S. and Canadian operations, mainly due to an increase in sales volume, to a decrease in the cost of certain raw materials, and to an improvement in the production rate at one of the Company's plants.

• The company posted a net profit of CAD 26.37 million, higher than CAD 15.61 million a year ago. 

Risks associated with investment

The company is exposed to a variety of risks, including the economic, industrial, competitive and regulatory environment, its ability to attract and retain customers, changing consumer preferences, the availability and cost of raw materials and transportation, etc. 

Valuation Methodology (Illustrative): Price to Earnings 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company observed a marked increase in industry sales volumes in the U.S. and Canadian fruit juice and drinks markets. Excluding Sun-Rype's sales and foreign exchange impacts, the Company's sales were up 5.3% in the third quarter of 2020 compared to the same quarter in 2019. Barring any significant external shocks, including the impacts of COVID-19's evolution, the Company expects that, for 2020, it would be able to achieve a consolidated annual sales growth rate above that of 2019. Furthermore, the group is going for capacity addition, and the management expects an increase in sales by 25% to 30% upon completion of the project. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 161.01 on February 25, 2021. We have considered Rogers Sugar Inc, Simply Good Foods Co, B&G Foods Inc., etc; as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.